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Cautious Optimism – Economy and Landscape

Since last summer, I have been writing about the impact of the Great Recession on planning and landscape architecture. My vantage point, as a college professor, means that I see creative, bright young people who have had the odds stacked against them for the past few years. Today, I am passing on an optimistic article, one of the many written over the past four years. Somehow, this one has a hint of possible truth to it, and I know that I, for one, am eager to hear good news. The premise is that the U.S. has finally reached a point where pent-up demand will finally loosen the purse-strings of those who have been sitting on cash and afraid to spend. Perhaps it rings true because I just came from a meeting where attendees discussed putting a multi-million construction project out to bid (we’ll never get a better interest rate…) because I’m one of the people driving an old car, knowing that it won’t last indefinitely.

Of the people who fear the country’s best days are behind it, a well-known economist recently said that people in 1933 thought the same thing. In that spirit, take what you will from this:

Karl Smith, an economist at the University of North Carolina and author of the Modeled Behavior blog, is a major proponent of this forecast — what you might call Recovery Winter.Slate’s Matt Yglesias explained it here. I went straight to the source to hear why Smith concluded that a real recovery was finally looming, and decided to take his prediction public at the considerable risk of embarrassment if the gloom-and-doomers turn out to be right.

Smith’s theory isn’t new — it’s an application of the widely held understanding of how all recessions ultimately come to an end. Pent up demand overtakes people’s aversion to spending and investment, idle resources get put to use, and the country’s economic engine revs up. He just thinks we’ve reached that point now.

“I first started to think that a recovery was imminent, that we’d see a recovery coming soon was probably the middle of 2011,” Smith says.

Specifically, Smith noticed that apartment vacancies were falling, while the apartment stock remained tight. He also noticed that the nation’s auto fleet was aging extremely quickly.

“There were more older cars than there were newer cars,” Smith said. “That means not only is the auto fleet old, but it’s going to get really old really fast.”

The recession did a lot of harm to the country, but it didn’t freeze the size of the population. It didn’t eliminate peoples’ need to travel and commute. And it didn’t change the fact that people need places to live — even if their homes have been foreclosed.

“Those two parts of the economy were going to show pent up demand,” Smith reasoned. “I expected to see rents rising and used car prices rising.” Sure enough, rents started rising, used car prices started skyrocketing. That, Smith realized, would push people into buying new cars and developers into building new apartment complexes.

So far, he’s been proven correct, with potentially huge implications. “Houses and cars are the main pieces of capital we have in the economy,” Smith says, and economic theory holds that when people finally start reaching under their mattresses to invest in them, it can set off a virtuous cycle of growth, and revitalize a weakened economy.

“There’s some return on capital in the economy — when you build a new building or piece of machinery it has some rate of return,” Smith explained. That potential return is why in normal times people take risks instead of just hoarding cash — it sets what’s known as the “natural rate of interest.” During the recession, that rate actually became negative, leaving people content to let their money idle at zero interest rather than invest it in the economy.

Years later, things need to be replaced, the housing supply becomes inadequate, and demand increases, pushing that rate up. Smith thinks it’s now higher than zero — and barring an external shock, should be enough to usher a recovery.

“Watching the rents rise, watching the used car prices rise, I thought at some point this is going to catch — it’s going to be a self-reinforcing cycle,” Smith said. “Eventually any recession is going to end from this very effect. Once things get old enough people are going to go out and buy new stuff.”